NEW DELHI (Reuters) - India opened its retail sector to foreign supermarkets on Friday, a major economic reform that has been stalled for months by political gridlock and came as part of a package of measures aimed at reviving growth.

The policy comes with provisos which, some analysts said, could hamper firms hoping to set up shop in the world's second-most populous country.

Following are key aspects of the policy:

STATES TO DECIDE ON IMPLEMENTATION

Individual state governments will decide whether to allow foreign supermarket chains to enter. The Congress party-led government hopes this will take the sting out of opposition from regional parties who say the policy will destroy jobs.

Opponents of the reform include Mamata Banerjee, the chief minister of West Bengal and the most powerful ally in Prime Minister Manmohan Singh's government.

SOURCING FROM SMALL COMPANIES

Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than $1 million. Supermarket chains will certify compliance with this themselves.

The government will reserve the first right to procure food produce from farmers before companies do, in order to provide stocks for its food subsidy schemes for poor households.

MINIMUM INVESTMENTS

Foreign retailers will have to invest a minimum of $100 million, and put at least half of their total investment into so-called 'back-end' infrastructure, such as warehousing and cold storage facilities. This requirement has to be met within three years of a retailer setting up shop.

The aim is to meet one of the key justifications for opening the supermarket sector to foreign players -- revamping the country's crumbling infrastructure and unclogging bottlenecks.

The bottlenecks fan inflation, which has proved a major headache for the government and the Reserve Bank of India.

Policymakers argue opening the sector will help ease prices for a country where hundreds of millions live in dire poverty.

BIG CITIES

Foreign retailers will only be allowed to set up shop in cities with a population of more than 1 million. In states where there are no cities with such a big population, individual state governments can choose where to allow foreign chains to open.

Critics of the new retail policy, including from opposition parties and domestic traders, say opening the doors to the likes of Wal-Mart will wipe out the country's small, family-run neighbourhood stores and trigger mass unemployment.

By restricting foreign firms to cities, the government hopes the supermarkets will become accessible to the country's swelling middle class, while protecting the livelihoods of shopkeepers in smaller towns and rural areas.

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